Grassley seeks clarity on farm bankruptcy law

Chapter 12 bankruptcy, a provision of the law written for farmers who are trying to reorganize debts, was weakened by a Supreme Court ruling Monday that requires an Arizona farm couple to pay full capital gains taxes on land sold after they had entered into a reorganization plan.

Senator Chuck Grassley (R-IA) said Tuesday that he will introduce legislation to keep the law more farmer-friendly.

“I’m definitely going to do a bill to clarify the law,” Grassley told Agriculture.com.

Grassley has defended his view that bankrupt farmers should be protected from full tax liability previously in Congress. “I remember telling my colleagues you can’t get blood out of a turnip,” he said Tuesday.

“Although Chapter 12 remains a farm-friendly alternative to other bankruptcy plans, this decision does diminish the ability of famers to structure a viable Chapter 12 plan,” says Gary Maydew, a retired professor of accounting at Iowa State University who writes for Successful Farming magazine. “Often a sale of the farmer’s appreciated farm land may represent the best vehicle to use to execute a payment plan. By asserting the capital gains tax on the sale, the IRS will hinder the ability of farmers to successfully implement a reorganization.”

The case decided by the Supreme Court Monday dealt with the farm bankruptcy of Lynwood and Brenda Hall.

The Supreme Court, in a narrow 5-4 decision denied the Halls the ability to have federal income taxes discharged on a post-petition sale of farmland. In Hall v. United States the farm couple sold their farm shortly after petitioning for bankruptcy under Chapter 12.

Here is Maydew’s analysis of the case:

“Chapter 12 bankruptcy plans require full payment of priority claims. However, taxes incurred by the estate in a Chapter 12 bankruptcy are stripped of priority status (i.e., thrown in with other general unsecured claims that may be discharged with partial payment).

"After filing for Chapter 12 bankruptcy and selling their farm, the Halls proposed a plan under which they would pay their liabilities with proceeds from the sale. However, the IRS objected to the plan, asserting a claim of capital gains tax of $29,000 on the sale. The Halls then proposed treating the tax as an unsecured claim to be partially paid, with the remainder to be discharged.

"The case wound though the Bankruptcy Court and a U.S. District Court, before the Ninth Circuit ruled against the Halls. The Supreme Court agreed to hear the case because the Eighth Circuit had ruled in favor of a taxpayer in that circuit.

"The case hinged on whether the federal income tax liability was incurred by the bankruptcy estate or the farmer (the Halls). If deemed incurred by the estate, then the relevant provisions of Chapter 12 provide for the federal tax to be downgraded from priority to a general, unsecured claim. However if the taxes were incurred by the Halls, then the taxes would remain a priority, not dischargeable under a Chapter 12 plan.

The Minority Opinion in Hall Was CorrectBarry Barash 05/17/2012 @ 9:37am
I file more Chapter 12's than any other Illinois lawyer and am a long-time Fellow of the American College of Bankruptcy. The problem with Hall's majority opinion is that most farm-asset sales occur post-petition and few occur in the year preceding bankruptcy. While the text of Section 1222 of the Bankruptcy Code could have been clearer, the majority's opinion emasculates Section 1222's intent and doesn't take into account the reality of what occurs in Chapter 12 practice. Congress can correct a bad Supreme Court decision and should do so here.
Barry M. Barash, Galesburg, IL